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Protecting low paid employees: universal credit and employee ownership bonuses


United Kingdom

The start of 2020 saw press coverage relating to companies who had seen their good intentions thwarted when they had paid cash bonuses to staff only to see that the staff lost a corresponding amount of their benefits provided through Universal Credit.

In practice, paying bonuses often had a negative effect, because employees were left short of money in subsequent periods and the bonus payments caused real hardship.  The political background to this (and whether Boris ever earned his Gregg's vegan sausage roll from Jeremy Corbyn for justifying the mechanics of Universal Credit) is beyond the scope of this bulletin, but there is one limited situation in which bonuses can be paid and Universal Credit payments not affected.

Qualifying bonus payments made by companies controlled by an employee ownership trust ("EOT") or a deemed EOT are exempt from income tax.  Qualifying bonus payments are therefore not treated as earnings for the purpose of Universal Credit and will not affect the entitlement to benefits.

It is important that the Real Time Information ("RTI") provided to HM Revenue & Customs correctly shows EOT bonuses as non-taxable earnings, as the Department of Work and Pensions uses this information for the purposes of calculating a claimant's earnings.  However, on that basis, the Department of Work and Pensions have confirmed that qualifying bonuses should not affect Universal Credit.  This, in addition to the ability to pay £3,600 free of income tax (but subject to National Insurance contributions), means that the ability to pay qualifying bonuses is a significant advantage for employee-owned businesses.

It is always important to check that the statutory criteria for making qualifying bonus payments are met on each occasion before bonus payments are agreed or made.  We advise that a written plan is drawn up and that a checklist is included to confirm that the criteria are met and that bonuses qualify.  If you are in the process of preparing to make payments please do get in touch for assistance in relation to Universal Credit or more generally.

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